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Are you merging the leads in Marekto or your CRM? Are the resulting two duplicate Contact records appearing in Marketo or your CRM or both?
Pedowitz helped us out with this one. The issue was that our SF synchronization user did not have admin rights in SalesForce.
We were attempting the merge in Marketo, but it created two contacts instead of just one - and then synched to SF as two separate contacts as well.
Glad you figured it out. I would have hoped that Marketo would handle that condition more gracefully. We've had a similar fail when converting or merging 2 Leads / Contact in SFDC, but prior to the merge, the email address is deleted from one of the SFDC records. The result is that the Marketo leads are not merged and you wind up with an "orphan" lead in Marketo that can't be merged into another record.
Elliot - thanks for the head's up on the orphan leads!